Journal article

Explaining the early years of the euro exchange rate: An episode of learning about a new central bank

M Gómez, M Melvin, F Nardari

European Economic Review | Published : 2007

Abstract

Many observers were surprised by the depreciation of the euro after its launch in 1999. Handicapped by a short sample, explanations tended to appeal to anecdotes and lessons learned from the experiences of other currencies. Now sample sizes are just becoming large enough to permit reasonable empirical analyses. The model of this paper provides empirical support for the euro exchange rate to be affected by learning. By focusing on euro-area inflation as the key fundamental, the model is structured toward the dynamics of learning about ECB policy with regard to inflation. While a stated target inflation rate of 2 percent existed, it may be that market participants had to be convinced that the ..

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University of Melbourne Researchers

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